Chapter 42.

01 of the Companies Act: Auditors

Companies Act is a RULE based Act. One should follow the rules as given in the sections and rules of the
Companies Act.

CA students should have very good knowledge on these provisions as these are going to be followed in
practice. Broadly, in this chapter you will understand “who can be appointed as an auditor under the
Act, i.e., qualifications and disqualifications, the manner of appointment and removal of an auditor and
rights and duties of an auditor”.

Section of Companies Act, to be discussed in this chapter

191 Appointment of Auditors, Appointment of partnerships as auditors,

193 Automatic reappointment, Appointment of first auditors
195
196

197 Replacement of Auditors, Auditors not seeking reappointment.

198

194 Eligibility, Qualifications and Disqualifications of Auditors

192 Remuneration of Auditors

201 Access to information

204 Duties of auditor on becoming aware of irregularities

200 Auditors to sign Audit Reports, etc.

202 Auditors to attend General Meeting

2. Qualifications and Disqualifications of Auditor [Section 194]
The Section 194 has two sub-sections
194(1) – discuss about Qualifications;
194(2) – discuss about Disqualifications.

3. Qualifications of an auditor [Section 194(1)

Section 194

(1) A person shall be eligible for appointment as an auditor of a company only if he is a

member of BICA and qualified under the rules of the institute.

A partnership whereof at least one member is ordinarily resident in Botswana.

(2) Disqualifications of Auditors

[Section 194(2):

The following persons shall not be eligible for appointment as an auditor of a

company, namely:

(a) “a body corporate”;

Explanation

It means – If chartered accountants form a company (Whether public /private – like RK

Private Ltd./RK Limited) – This Company of CAs cannot be qualified for appointment as
auditor of another company.

What is body corporate?

Body corporate includes a company as per the Companies Act, and a foreign company
which is incorporated outside Botswana.

Logic behind why a body corporate is not eligible to be an auditor?

As you know a Limited company has “limited liability” & Separate legal entity – The
members of the company are responsible only to the extent of unpaid capital (if any). In
case of any issue – We cannot make members personally responsible.

In case of partnership, partners will have unlimited liability; hence it is allowed to be

auditor.
(b) an officer or employee of the company;

Explanation

 Any director;

 Manager;

 Key managerial personnel (KMP); or

 Any person in accordance with whose directions or instructions the

BOD or any one or more of the directors is or are accustomed to
act.

 ‘Key Managerial Personnel’, in relation to a company, means:

 the chief executive officer (CEO) or the managing

director or the manager;

 the company secretary;

 the whole-time director;

 the chief financial officer (CFO); and

 such other officer as may be prescribed. Like Chief

Operating Officer (COO), etc.

Reason

An officer or employee – cannot be independent – If those are appointed as auditors of

the company, they cannot express independent opinion on the financial statements.

(c) a person who is a partner, or who is in the employment (employee), of

an officer or employee of the company;

Explanation

In this case, two relations are possible i.e.,

Reason
These people have indirect relationship; hence they are not independent and cannot be
appointed as auditor.

(d) a person who, or his relative or partner

(e) is holding any security of or interest in the company or its subsidiary, or of its
holding or associate company or a subsidiary of such holding company;

Who is relative?

“Relative” includes

 Step father, Step mother, Step brother, Step sister & Step son, Step
daughter.

It says Auditor (himself) or his Relative or Partner should NOT hold security in GROUP.

What do you mean by Security ?

The word “Securities” include – All Shares, scrips, bonds, debentures, stock, derivatives
etc.

(e) a person (auditor) or a firm who, whether directly or indirectly (through

agent/relation), has business relationship with the company, or its subsidiary, or its
holding or associate company or subsidiary of such holding company or associate
company;

It says – Auditor or Firm should not have business relationship with the group either
directly or indirectly.

What is business relationship?

‘Business relationship’ shall be understood as any transaction entered into for a

commercial purpose, except (means the following are not treated as business
relationship)

(i) commercial transactions which are in the nature of professional services

permitted to be rendered by an auditor or audit firm.

(ii) commercial transactions which are in the ordinary course of business of the
company at arm’s length price – like sale of products or services to the auditor, as
customer, in the ordinary course of business, by companies engaged in the business of
telecommunications, airlines, hospitals, hotels and such other similar businesses.

Just think,

Mr. A is a chartered accountant in practice – His wife (relative) is a director in ABC Ltd.
and she has P50,000 face value equity shares in the company.

Can Mr. A be appointed as auditor for ABC Ltd.?

(f) A person

(In simple words – a person whose relative is a director or key managerial person of the
company is disqualified)

Frequently Asked Questions (FAQs)

FAQ 1. Whether a Non-Executive Director (Part time director OR independent

director) be appointed as Auditor?

No. The reason is every director is covered under the term “Officer”.
FAQ2. Whether a Person who is Relative of Director or Employee of the Company be
appointed as Auditor?

If relative is a director – NO

If Relative is an employee other than KMP – Yes; partner of an employee and employee
of an employee are prohibited to be appointed as Auditor. Whereas, relative of an
employee is prohibited to be appointed as Auditor only when such employee is
Director/KMP)

FAQ 3. Can an Auditor be said to be Indebted if he recovers travelling and other

expenses in Advance?

Yes. It is treated as “indebted” and disqualified if the amount is greater than P5,000.

5. Appointment of Auditors [Section 191,193,194,196,197]

These sections discuss appointment of first auditor, subsequent auditor, rotation of

auditors and casual vacancy.

6. Appointment of the First Auditor [Sec. 196]

 The first auditor of a company shall be appointed by the Board of

Directors (only by BOD) before the first AGM.

 In the case of failure of the Board to appoint such auditor, it shall inform
the members of the company, who shall appoint at the first general
meeting.

 The first auditor shall hold office from the date of appointment
to till the conclusion of the first AGM.

7. Appointment of Subsequent Auditor/Reappointment of Auditor

[Sections 195,197,198]

(1) Every company shall, at the First AGM, appoint an individual or a firm as an auditor
of the company.
  Every company means ALL the companies incorporated under the
Act;

 Ordinary resolution is sufficient to appoint an auditor.

8. Manner and Procedure for Appointment

The competent authority to appoint auditor is Audit committee of the company (if the
company has); If it does not have audit committee, Board of directors are competent
authority.


 The entity should obtain written consent and a certificate before the
appointment is made at AGM. Auditor should certify that

(a) Individual/firm is eligible for appointment and is not disqualified for appointment
under

a. the Companies Act,

b. the Accountants Act,

(i) the proposed appointment is as per the term provided under the Act;

(ii) the proposed appointment is within the limits laid down by or under the authority
of the Act;

(iii) the provided list of proceedings relating to professional matters of conduct against
the auditor or audit firm or any partner of the audit firm pending with respect to is
true and correct.

After this

Company appoints the auditor at AGM by passing ordinary resolution and thereafter,
the company should

1. Give the information of appointment to the auditor i.e., it should write a

letter to the auditor by attaching “extract of resolution in the minutes of
AGM”; and

We must note that:

Where a company is required to constitute an Audit Committee, all appointments,

including the filling of a casual vacancy of an auditor under this section shall be made
after taking into account the recommendations of such committee.

9. Term & Rotation of Auditor

Rotation of auditors is a new topic in Botswana. As per the Code, a company should
rotate auditors after specified time. It means, the same auditor cannot continue
forever. Let us get into the details of the section.

Cooling off Period

An auditor who completed the term as discussed above i.e., Individual (one term of 5
years)/Firm (two terms of 5 years each) is NOT eligible for re-appointment as auditor
for 5 years.